The Triple Whammy of Taxes: How the AMT, Repealing the Bush TaxCuts, and the Social Security Wage Cap Would Raise Taxes onMillions of Americans

With the Democratic majority in Congress considering new
spending plans, there is renewed concern in Washington about
whether Congress will raise revenues to pay for new spending.
Speaker of the House Nancy Pelosi has specifically endorsed
increasing taxes on wealthy taxpayers, and other potential tax
increases have been mentioned. The House leadership is reportedly
discussing raising the Social Security wage cap and repealing some
of the Bush tax cuts. Meanwhile, millions of Americans will be
sucked into the vortex of the onerous Alternative Minimum Tax
(AMT).

Each of these would raise taxes on millions of Americans and
harm the economy. Taken together, they
would create a triple whammy that would subject millions of
Americans to three tax hikes at once.

Given the growing appetite for more spending on Capitol Hill and
the recent return to pay-as-you-go (PAYGO) budgeting, Congress will
likely consider these tax increases. Members of Congress, the
national press, and especially taxpayers should understand just how
many people would be affected by such legislation.

The Alternative Minimum Tax

The AMT is a pernicious tax that guarantees tax increases for
millions more Americans each year. Moreover, it forces taxpayers to
calculate their tax liability multiple times. The AMT also prevents
some taxpayers from receiving the full value of the Bush tax
cuts.[1] Unless Congress enacts another "hold
harmless" provision, the AMT would hit
the most taxpayers of these tax increases:

Twenty million more tax filers would be forced to pay on
average almost $3,000 more in taxes due to the AMT this year.

The problem with extending the hold harmless provision is that
it costs almost $50 billion for one year alone. Congress would have
to find a way to pay for this if it is serious about PAYGO
discipline. If AMT is not reformed, approximately one in four
income taxpayers will be subject to the AMT by 2013.[2] But if
an AMT fix is offset by raising other taxes, it would still be a
tax increase and a move in the wrong direction.

The Social Security Wage Cap

Another proposal is to raise revenues by increasing the Social
Security wage cap. This idea has been promoted by Members of
Congress and several influential groups[3]. In 2007, the wage cap is
scheduled to be $97,500 under current law. Raising the wage cap
would impact many Americans:

An increase in the wage cap would subject 10.3 million American
workers to sharply higher taxes.

On average, those affected would pay over $5,600 more in
payroll taxes each year.

Almost three million small business owners and entrepreneurs
would be hit especially hard by this tax increase.

Many schoolteachers, nurses, police officers, and similar
professionals would be hit with higher taxes.[4]

Increasing the Social Security wage cap is the wrong solution to
Social Security's long-term financing problem, and it is not the
way to achieve retirement security for Americans. This proposal
would subject millions of Americans to a painful tax increase that
would harm the economy and do little to extend the solvency of
Social Security.[5]

Repealing the Bush Tax Cuts

In 2001 and 2003, President Bush signed into law a series of tax
cuts that reduced marginal tax rates on income and the taxation of
capital and ended the marriage penalty. Speaker Pelosi is the most
prominent politician to call for repeal of the Bush tax cuts for
the wealthy. However, repealing the Bush tax cuts-especially the
lower tax rates on ordinary income, the lower rate and one-year
repeal of death taxes, and the lower rates on capital gains and
dividend income-would reduce investment, job growth, and the
incentives to work for many Americans:

Approximately 4.7 million tax filers, earning over $200,000,
would pay higher taxes if the Bush tax cuts were repealed.[6]

The average tax increase would be over $14,000 per tax
return.

The Triple Whammy

The impact of any of these tax increases alone would be
worrisome. But many Americans would be subject to more than one of
these tax increases. The majority of taxpayers affected by a repeal
of the Bush tax cuts would also be subject to an increase of the
Social Security wage cap-a double whammy. Between these two tax increases, over 14
million taxpayers would face over $20,000 more in taxes each
year. Their marginal tax rate would increase to almost 50 percent,
not including any state or local taxes.

Worse yet, over two million tax filers would be hit by all three
tax increases-a triple whammy. These taxpayers earn above $200,000
in adjusted gross income, have earnings above the wage cap, and
would start to pay additional taxes as a result of the alternative
minimum tax.[7] Some of these taxpayers would face marginal
tax rates in excess of 50 percent on earned income-a level not seen
in over 20 years. This group of taxpayers is especially important
to economic growth because it includes many entrepreneurs and
investors who create jobs and growth. Thus, the triple tax whammy
would also harm the economy and opportunities for all
Americans.

Conclusion

While many in Congress have publicly espoused the laudable goal
of restraining spending, which would slow the growing financial
burden on current and future generations, they should not pay for
new spending by raising taxes. Instead, Congress should focus on
limiting federal spending and restraining the growth in entitlement
costs. The three tax increases would harm the economy and subject
too many taxpayers to significantly higher marginal tax rates, with
millions suffering the triple whammy.

[1]
However, if the Bush tax cuts are repealed, some individuals may no
longer be subject to the AMT because their regular tax liability
would increase. Their total tax liability will remain roughly the
same, but they will pay taxes under the traditional tax system
rather than the Alternative Minimum Tax.

[2] If
the AMT is not fixed, it will affect approximately one out of every
seven of the 130 million tax filers projected for 2007. That number
will increase as more taxpayers are forced to pay the AMT.

[5] A
2003 Social Security Administration report found that raising the
wage cap would extend solvency by less than a decade. This is
because the increased Social Security taxes would generate new
future liabilities. Chris Chaplain,
Actuary, and Alice H. Wade, Deputy Chief Actuary, Social Security
Administration, "Estimated Long-Range OASDI Financial Effects of
Eliminating the OASDI contribution and Benefit Base."

[6]
These numbers are based on the Center for Data Analysis tax model
and the following policies: increasing the top two marginal tax
rates, raising the tax rate on capital gains to 20 percent, and
ending the dividends exclusion.

[7] The
number of filers was calculated by estimating the number of filers
who are affected by the AMT, have wages and salary above the Social
Security wage cap, and report adjusted gross income above $200,000.
It is assumed that the 20 million new AMT filers would have roughly
the same characteristics as current AMT payers and others with
earnings and income that meet the above specifications.